The yield buyer
Today’s market participants often lament that credit spreads are too compressed. Indeed, in many cases, spreads — having reached the top percentile in historical tightness across some sectors — may offer little upside potential. However, several disparate factors tend to drive total returns in fixed income and explain why spreads could remain in this lower range for some time.
Focusing too narrowly on spreads and awaiting a mean reversion toward more attractive levels could cause investors waiting on the sidelines to forgo some compelling investment opportunities. Investors should be aware of several key factors that may drive their fixed income returns in the current environment:
1. Spread dispersion
Despite tight spreads across some sectors at the index level, dispersion is still fairly wide in spreads among different sectors and individual issuers. And there’s no shortage of potential drivers of spread volatility, including diverging central bank monetary policy , continued geopolitical conflict , and volatile US fiscal policy. Further dispersion among credit sectors would present more attractive entry points to add risk, in our view.
In fact, certain spread sectors, such as bank loans, collateralized loan obligations (CLOs), and commercial mortgage-backed securities (CMBS) remain attractive from a longer-term spread perspective. Many of these asset classes can be accessed through either standalone investments or multi-asset credit strategies.
